401K Plans - Career Move Savvy Part 2

2006-12-14

In the first part of this set, we looked at how to manage retirement funds, rolling them over to a new employer or an IRA. That takes care of the money moves, the tax implications, and managing the process. However, that still leaves an open question - How is this money to be invested?

Between different 401(K) plans, or even a 401(K) and an IRA, the options available for investment can vary significantly. The funds or other investment opportunities available as well as the price you pay, determine the choices you have; the return you make depends on the best possible mix of these.

In general, whether for retirement funds or other investments, it pays to have a clearly articulated investment strategy. Key points to be considered :

• Invest for growth. Investments that pay a regular income make sense only when you’re retired, and don’t have any income source; when you’re young or midway through your career, you have other options and ways to earn for expenses.

• Diversify your investments; you don’t want any adverse developments eroding the entire value of your kitty. Even if there is an occasional reverse, it shouldn’t break the bank.

• 401(k)’s or IRA’s are tax deferred – you don’t have a tax bite until the money is withdrawn. As such, tax-free or tax planning investments don’t generally make sense.

• You can extend out benefits by suitably structuring your rollover and withdrawal plans; get the maximum advantage by planning it up front.

Investment options

Target-date retirement funds are a simple option, especially when starting out with your retirement planning. These are all-in-one portfolios that split your money between stocks and bonds, tilting the mix as you grow older.

Index funds are another good low-cost option to manage your risk. By spreading your funds across a few different indices including foreign stocks, total market, specific sectors, or even bonds.

Once you have a reasonable sized nest egg, explore alternative aggressive options like REIT’s or commodity funds like oil or metals – these can be a good inflation hedge, generally move opposite to stocks and help balance out your risk.

While approaching your retirement date, rolling over a part of your funds into annuities can provide you with a regular income in your retired days, to supplement social security and any pension that you might have.

Withdrawal options

If you stop working at the age of 55, you can start withdrawals without a penalty. IRA’s usually have a penalty for withdrawals before the age of 59 ½.

You usually have to start making withdrawals from the age of 70 years onwards, with a required minimum. Usually, 401(k) plans specify the options; it might be a cash out, or a predetermined schedule with no flexibility. IRA’s generally have more flexible options.

IRA’s also have more flexibility about nominating beneficiaries; you could choose to nominate your children or even grandchildren, stretching out the tax-free period. 401(k)’s usually require you to list your spouse as a beneficiary.

Some retirement funds allow you to choose between a variety of annuities, and do a partial rollover. Other employers don’t. If you have this issue, locking all your funds into a single annuity doesn’t make sense. Instead, roll it over to an IRA, and then do a partial annuity rollover.

Related Articles:
» 401K Plans - Career Move Savvy
» Your Financial Report Card - Wealth Creation
» Retire Early: Tips to retire early and live comfortably

Copyright 2006 Finance News Today. Articles can not be copied, reproduced or redistributed without written permission from Finance News Today. To request reprint permission please email us at info@financenewstoday.com